The Forecasting Power of the Volatility Index in Emerging Markets: Evidence from the Taiwan Stock Market

Ming Jing Yang, Meng-Yi Liu

Abstract

This paper explores the predictive power of the volatility index (VIX) in emerging markets from December 2006 to March 2010. The results of the study show that the models including both the volatility indicator and the option market information have a stronger predictive power. The predictive power of the models is improved by 88% in explaining the future volatility of stock markets, much better than that of other models merely considering the volatility indicator. With respect to the trading information from different types of investors in option markets, the trading information from the foreign institutional investors in option markets demonstrates a significantly positive relationship with the stock market volatility. In addition, the results of this paper also reveal that the volatility index (TVIX) of Taiwan stock index options is a strong indicator of future stock market volatility. The TVIX outperforms the historical volatility and the GARCH volatility forecast in assessing the activities of Taiwan’s stock market.

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